Credit Risk Mediation in the Dynamics of Income Diversification and Sustainable Growth: Evidence from Banks in the West African Monetary Zone

HRMARS - Banks have played an important role in economic development in recent decades by forming capital, allocating credit, and facilitating financial transactions. However, their sustainability has been hampered by increased competition, technological advances, regulatory restrictions, and recurring financial crises, especially in emerging nations. Against this backdrop, this study investigates the impact of income diversification on the sustainable growth of banks in the West African Monetary Zone, with a particular emphasis on the mediating role of credit risk. The analysis uses structural equation modeling with bootstrapped mediation tests on an unbalanced panel of 20 publicly traded Nigerian and Ghanaian banks from 2015 to 2024. The findings show that bank income diversification has a beneficial and significant direct impact on banks' sustainable growth rates. However, credit risk partially balances this gain, resulting in a significant negative indirect effect and a negligible total effect. This pattern shows a suppression effect, emphasizing the dual nature of income diversification strategies in the WAMZ. The findings imply that income diversification can improve growth prospects provided there is adequate credit risk management. This study adds to the literature on bank stability and sustainable growth by explicitly modeling credit risk as a transmission channel.